‘Plan C’ more practical – and more progressive – than ‘Plan A’

Date Published: 03/21/2013

Author: Dane Smith

ST. PAUL LEGAL LEDGER CAPITOL REPORT

Gov. Dayton’s “Plan A” for a 21st-century tax overhaul was ambitious and rather breathtaking. And that rushing wind we’ve been hearing for two weeks is actually a long, relieved, collective exhale. Just about everybody’s breathing easier since he announced a reset of his tax-and-budget proposal.

Although Dayton has revamped his plan to alleviate chronic revenue shortages and thus accommodated the loud complaints from business associations, we’re likely to see continued efforts to broaden the state sales tax, and to cut the overall rate, for years to come. That door should remain open.

With the historic shift of our economy from goods to services, it doesn’t make sense to leave a growing sector untaxed. Other states are beginning to move in that direction, and an intriguing article in The Economist this week describes China’s decision to tax services. All businesses and their consumers benefit from public investment and the good things that state-and-local taxes buy, and they ought to contribute a more consistent share of the cost. And it’s encouraging to see that some legislative leaders are not abandoning proposals to broaden the sales tax.

Dayton said from the beginning that he would happily consider an alternative “Plan C,” and that the only unacceptable choice was “Plan B,” or doing nothing at all to raise new revenues or to make taxes fairer in Minnesota. He was wise to offer his own alternative rather than wait for and react to potentially endless permutations of a Plan C in the Legislature.

His own Plan C is much more practical politically, and it’s no surprise that he got an ovation from the Chamber of Commerce for abandoning the proposal to remove the exemption on business-to-business services, as well as the other base-broadening. Also gone are property tax rebates for most homeowners, which some tax experts viewed as clumsy and not well targeted to actual need.

It’s not often that a fallback plan pleases competing interests, but Dayton appears to have accomplished that with the broad coalition of groups pushing for revenue sufficiency and fairness. Progressive groups and labor unions are expressing mostly unqualified praise for a Plan C that retains the higher taxes on an increasingly wealthy top 2 percent, increases the size of the bonding bill for public works infrastructure, increases the funding for progressive tax relief through the property tax circuit-breaker and the renters’ credit, and holds fast to original plans to invest some $640 million in new resources in the birth-to-career education continuum.

One of the problems with Plan A was that the broadening of the sales tax, which is the most regressive of taxes, kept the package from being much more progressive. With most of the new revenue now coming from the top tier, and with the augmentation of targeted low-income homeowners’ and renters’ credits on the property tax side, the Suits index (measure of tax progressivity) from the total package is likely to be much more friendly to lower and middle-income taxpayers.

The case for restoring higher rates on top incomes — remember that those rates were much higher at the top before big state income tax breaks for the wealthy in the 1980s and again in 1999 and 2000 — has been strengthened by mounting factual evidence of increasing inequality.

The Star Tribune’s Lori Sturdevant analyzed the background dynamic with telling detail in her latest commentary, noting that in the first full year of recovery after the Great Recession the top 1 percent captured 93 percent of economic growth. Recent reports on wealth inequality show even wider disparities than on annual income inequality, and a mesmerizing video presentation, “Wealth Inequality in America,” recently has gone viral. The story of this Great Divide will only get bigger in coming months and years.

Popular support for raising the top rates is unquestioned. In poll after poll after poll, nationally and in Minnesota, strong majority support lines up for raising taxes on those households that are capturing an ever larger share of our society’s resources.

Aside from fairness, a case for long-term business growth can be made if conditions improve for the vast majority of households and small businesses who occupy the bottom 80 percent of the economy — those making less than roughly $100,000 per year. Those households need top-quality early childhood education and care, lower tuition, more options in public schools and colleges, affordable public transportation choices and better roads, and health-care security for their families and elderly. And those nearer the bottom of the income ladder also need higher wages (minimum wage increases are not a budget item but are on the governor’s agenda). These are the main things provided by our state and local governments, and all get healthy reinvestment from the governor’s plan.

Concern about competitiveness can’t be dismissed. Taxes can make a difference for business location decisions, but many economists agree that taxes are not nearly the most important factor in whether businesses thrive or stagnate. A high-quality workforce and customers who have enough money to buy their products are far more important factors.

The proof, or lack of it, is in the pudding. A recent New York Times column by economic writer Eduardo Porter, under the headline “Blessings of Low Taxes Remain Unproved,” outlined in considerable detail how the track record of the last three decades simply does not support the theory that lower taxes on the wealthy are a surefire ticket to growth.

In an evenhanded, apolitical analysis, Porter concluded that “government spending — on things like education, infrastructure and basic research — can contribute to growth, too.”

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A version of this column originally appeared in the St. Paul Legal Ledger Capitol Report on Thursday, March 21, 2013.